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SMIC’s revenue in the third quarter was US$1.415 billion, and SMIC is still bullish

SMIC (0981.HK/688981) released its third-quarter 2021 financial report (as of September 2021) on the evening of November 11, Beijing time, after the long bridge A shares/Hong Kong stock market. The main points are as follows:

1. Revenue and gross profit margin both hit record highs. SMIC’s third-quarter revenue was US$1.415 billion, exceeding market expectations close to the upper limit of the guidance. The increase in quarterly revenue was mainly due to the increase in the average price of shipments, which was affected by both price increases and structural improvements due to the high industry boom. And the company’s record-high gross profit margin, the price increase is the most important factor, and the impact of raw materials on costs did not have an impact on SMIC.

2. The capacity utilization rate will break 100% again and continue to be fully loaded. SMIC’s capacity utilization rate reached 100.3% in the third quarter, exceeding 100% for two consecutive quarters. The industry’s high prosperity continues, the company’s orders are still sufficient, and the logic continues in the short and medium term.

3. The general trend of domestic substitution is intensifying. In the third quarter, the proportion of revenue from China and Hong Kong exceeded 65% for the first time after the Huawei incident. Strong demand for domestic replacement, other customers are filling/surpassing the capacity gap of Huawei’s exit. The proportion of 12-inch wafers and the proportion of 28nm and below processes have both hit a record high, and SMIC is working hard to keep the domestic replacements in short supply.

4. The operating data was stable, and EBITDA reached a record high in the same period. The three expense ratios and the proportion of inventories remained within a relatively reasonable range, and the proportion of accounts receivable showed a quarterly increase. The company’s EBITDA measure hit a record high for the same period in the quarter, driven by the addition of profit and depreciation and amortization. Profit margins (before interest, tax, depreciation and amortization) for the quarter continued to be historically high.

5. Guidance for the next quarter: revenue in the fourth quarter is 1.57-1.60 billion US dollars (Bloomberg expects 1.381 billion US dollars), an increase of 11%-13% month-on-month, and gross profit margin is 33-35% (Bloomberg expects 31.31%). 47%). Both quarterly revenue and gross profit margin continued to exceed market expectations. Strong guidance for the next quarter supports the company’s performance, and SMIC’s short- and medium-term logic is not broken.

Mr. Changqiao Dolphin looks at SMIC from the logic of “short, medium and long”:

The long-term logic of SMIC lies in the deterministic trend of domestic substitution of semiconductors, just as the status quo mentioned by Mr. Changqiao Dolphin in “SMIC (Part 1) on the “Core” Technology of Leading Leaders’ “In 35% of the global semiconductor sales In the market, China only supplies 15% of the world’s wafers, and there is a huge supply and demand gap in the Chinese market.” As long as there is a gap between supply and demand in China’s semiconductor market, the long-term logic of domestic substitution of semiconductor companies such as SMIC will not be broken.

SMIC’s short- and medium-term logic is based on performance. The three core indicators of performance are revenue, gross profit margin and capacity utilization. In the third quarter, SMIC’s revenue and gross profit margin hit record highs, and the capacity utilization rate continued to reach more than 100%. The company’s guidance for the fourth quarter continues to exceed the market, and the short-term logic has not broken with the release of performance.

SMIC is expanding the 12-inch wafer, which is the most scarce in China. SMIC is doing the 28nm and below production capacity that is the most lacking in China. “Short, medium and long” logic resonance, SMIC, as the vanguard of domestic replacement of semiconductors, forges ahead!

In terms of specific financial report performance, the detailed analysis of Long Bridge Dolphin mainly focuses on the following aspects: After SMIC’s performance in the second quarter exceeded expectations, can this quarter’s performance exceed the guidance expectations again? How much did the growth in revenue contribute from the dimensions of volume and price? What is the impact on the gross profit margin of the rising cost of raw materials? Supply is tight, does the weak performance of the mobile phone market affect SMIC? In the context of high-level calls, how is the progress of domestic substitution? Which process node of SMIC currently has more tight production capacity? What is the specific performance of SMIC at the operational level this quarter? Are inventories and accounts receivable at reasonable levels? What is the situation with EBITDA?

Mr. Longqiao Dolphin came to the financial report with these questions to find answers:

A core indicator of SMIC: revenue, gross profit margin and capacity utilization

For SMIC’s performance, we mainly focus on three core indicators, revenue, gross profit margin and capacity utilization. Mr. Changqiao Dolphin interprets the three major indicators of this quarter one by one, and let’s take a look at the internal situation behind the indicators.

Core Metric 1: Company Revenue

For the interpretation of SMIC’s revenue indicators, start with volume and price. By splitting the relationship between volume and price, how much is the contribution of volume and price in this quarter’s revenue?

SMIC achieved revenue of US$1.415 billion in the third quarter, setting a new record for quarterly revenue. The market expected 1.391 billion US dollars, which exceeded market expectations again. With the expansion of the company’s production, it has expanded in the dimension of volume, and the industry boom has pushed up the company’s shipping prices.

From the perspective of volume and price, the main driving forces for SMIC’s revenue growth this time are:

①In terms of volume, SMIC’s wafer shipments this quarter (equivalent to 8 inches) reached 1,720,000 wafers, down 1.5% from the previous quarter.

② In terms of price, the average wafer shipment price (equivalent to 8 inches) of SMIC this quarter was US$829, a month-on-month increase of 6.9%. The main driving force for the company’s revenue growth in this quarter is the increase in price, which reflects the continued improvement of the wafer boom from the price side.

Core Indicator 2: Gross Profit Margin

For the interpretation of SMIC’s gross profit margin, we start with the composition of gross profit. Through “gross profit per chip = average shipment price – fixed cost per chip – variable cost per chip”, what is the main driver of the change in gross profit margin this quarter? Under the cost pressure brought about by the increase in raw material prices, how much will the gross profit margin be affected?

SMIC’s gross profit margin in the third quarter was 33.1%, up 3% from the previous quarter. The gross profit margin is at the center of the company’s guidance range, in line with market expectations.

The cost analysis of the gross profit margin in the third quarter shows that the fixed cost of a single piece is US$212 and the variable cost of a single piece is US$339, so the total cost of a single piece in the third quarter is US$551, an increase of US$13 from the previous quarter. The increase in cost per wafer was mainly due to the increase in depreciation and amortization, while the variable cost of raw materials per wafer decreased slightly in the quarter.

Due to the increase in the average price of single-chip shipments to US$823 this quarter, fully covering the increase in cost, the company’s single-chip gross profit further increased to US$272.

Therefore, the increase in gross profit margin in this quarter was mainly due to the substantial increase in the average shipment price, and the raw materials did not put pressure on the company on the cost side.

Core Indicator 3: Capacity Utilization

The capacity utilization index not only reflects the quarterly operation of SMIC, but also reflects the prosperity trend of the entire wafer manufacturing industry. The boom in the wafer manufacturing industry has driven SMIC and many of its peers to continue to see full production.

SMIC’s capacity utilization rate in the third quarter was 100.3%, and the capacity utilization rate for two consecutive quarters exceeded 100%. Behind the continuous full capacity of the quarter, the overall market demand of the wafer manufacturing industry still exceeds the capacity of the supply side. The performance of short supply also confirms the short-term logic of the high prosperity of the wafer manufacturing industry.

2. A comprehensive perspective of SMIC: domestic substitution, intensifying

After reading the three core indicators, Mr. Changqiao Dolphin will give you an all-round perspective on SMIC’s quarterly report performance:

2.1) Various downstream markets: mobile phones are weak, and other fields such as automobiles continue to improve

The weak performance of the smartphone market in the second half of the year is also reflected in SMIC’s report. Although the smartphone business was still the company’s main source of revenue in the third quarter, the business proportion fell again to 31.5%.

The most obvious improvement in each application area is other businesses. Other businesses mainly include automotive, industrial and other application fields. The increase in the proportion of this business also reflects the strong downstream demand such as automobiles.

2.2) Each process node: 28nm and below hit a record high

In SMIC’s third-quarter financial report, one of the highlights is that the revenue of 28nm and below nodes has reached a record high, accounting for nearly 20% of the revenue.

In the third quarter of 2020, under the pull of Huawei, it once reached a staged high of 14.6%. Now, after Huawei is restricted, the proportion of 28nm and below nodes can reach 18.2%. It reflects the changes in both supply and demand: on the supply side, SMIC continues to expand its capacity at 28nm and below nodes (equipment and expansion are still in progress); on the demand side, although Huawei is restricted, due to the huge demand for domestic substitution, Other customers have filled and surpassed the capacity gap left by Huawei.

2.3) Each wafer size: the proportion of 12-inch wafers continues to increase

In terms of wafer size, 90nm and below are generally classified as 12-inch wafers in the market.

SMIC’s 12-inch wafer revenue share continued to increase in the quarter to 63.7%. From the perspective of the proportion of production capacity, SMIC’s future focus is still on 12-inch wafers, and the proportion of 12-inch products is expected to continue to increase.

In the third quarter, SMIC’s 12-inch wafer revenue increased significantly, reaching US$847 million, a year-on-year increase of 50.1%. 12-inch wafer revenue hit a record high again, due to the expansion of 12-inch production capacity and the increase in average shipment price.

2.4) Regional distribution: the general trend of domestic substitution

In the third quarter of SMIC, the proportion of revenue from customers in mainland China and Hong Kong increased to 66.7% again. This is the first time since the Huawei incident that the revenue share of customers in mainland China and Hong Kong has exceeded 65%.

This indicator also reflects that other domestically substituted customers have filled the capacity gap that Huawei has withdrawn. “Gathering is a mass of fire, and scattering is full of stars.” The general direction of domestic substitution of semiconductors is becoming more and more intense.

SMIC in terms of three operating data: overall stable, EBITDA hit a new high for the same period

3.1) Operating expenses: the three expense ratios remained stable

From the perspective of operating expenses, SMIC’s operating expenses in the third quarter were US$158 million. Following the “negative” operating expenses in the previous quarter, the data is back to normal again. The “unconventional” performance in the last quarter was mainly due to the impact of gains from asset disposals.

In terms of operating expenses for the quarter, research and development expenses were US$167 million, general and administrative expenses were US$72 million, and consumer and marketing expenses were US$7 million. Among the three expenses, general and administrative expenses accounted for the The slight increase in the ratio was mainly due to the trial operation of the new plant in Shenzhen and the amortization cost of the first restricted stock.

3.2) Operational indicators: the inventory level is reasonable, and the performance of the seasonal increase in accounts receivable

From the perspective of operating indicators, the main observations are from the company’s inventory and accounts receivable: SMIC’s inventory was 1.105 billion US dollars, an increase of 13.6% month-on-month; SMIC’s accounts receivable was 1.526 billion US dollars, A month-on-month increase of 53.2%. Combining the relationship between inventory & receivables and revenue on the balance sheet, inventory/revenue and receivables/revenue in the third quarter were 78.1% and 107.9%, respectively. From the perspective of operating indicators, the proportion of inventory remains at a historically reasonable level, and the proportion of accounts receivable has increased significantly. Historically, accounts receivable have seasonal characteristics, and their proportion is relatively high in the third quarter.

3.3) EBITDA indicator: a record high for the same period in history

From the perspective of EBITDA, SMIC’s profit before interest, tax, depreciation and amortization in the third quarter reached 893 million US dollars, a record high for the same period.

The quarter-on-quarter decline in EBITDA was mainly due to the impact of non-recurring factors such as gains from asset disposals in the previous quarter.

In terms of indicators, SMIC’s EBITDA mainly comes from depreciation and amortization. This quarter also mainly comes from the release of operating profit and depreciation and amortization. This quarter’s operating profit hit a record high for the same period, driving this indicator up.

The estimated profit margin (before interest, tax, depreciation and amortization) for this quarter also reached a record high of 63.1% for the same period.

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